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LATAM Airlines' Cost-Cut Plans Bode Well, Currency Woes Linger

Maharathi Basu

We recently issued an updated report on LATAM Airlines Group LTM. While the Latin American carrier’s efforts to control non-fuel unit costs are encouraging, devaluation of local currencies do not bode well for the company.

In fact, the company’s results in the first-quarter of 2019, released in May, were hurt by currency-related woes. Lackluster passenger and cargo revenues also resulted in the company underperforming in the first-quarter.

Capacity-related woes are also hurting the company. In fact, load factor (% of seats filled by passengers) has declined year to date owing to capacity expansion outweighing traffic growth.

Owing to the headwinds, shares of LATAM Airlines have underperformed its industry on a year-to-date basis. The stock has declined 10% compared with the industry's 7.2% rise.


However, we are impressed with the company’s efforts to reward its shareholders. In 2018, LATAM Airlines paid dividends worth $72.6 million, up 9% year over year.  Operating margin guidance for 2019 is also impressive. The carrier expects the metric between 7% and 9% compared with the 2018 operating margin of 6.8%.

Passenger revenues increased almost 2.5% year over year in 2018. Also, cargo revenues increased 6% in the same period. This bodes well for the stock and should boost the top line going forward.

Moreover, LATAM Airlines’ association with key airline players is likely to help the company attract additional traffic on key routes. Additionally, the company's prudent cost management should aid the bottom line going forward.

Zacks Rank & Key Picks

LATAM Airlines carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Air China Ltd. AIRYY, SkyWest SKYW and GATX Corp. GATX. While Air China sports a Zacks Rank #1 (Strong Buy), SkyWest and GATX carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Air China and SkyWest have gained more than 17% and 34%, respectively, so far this year. Meanwhile, GATX has an impressive earnings record, having outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the average being 16%.

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